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Big Tax Returns Are Bad

Credit: JaggedPixels / Source: ThinkStock
Credit: JaggedPixels / Source: ThinkStock

If you’re getting a really big tax refund this year, good for you! But I’m about to rain on your parade…

When you get a big refund, it’s because too much money was withheld from your paychecks. Maybe because you filled something out wrong on your W-4. Who knows…. even though it’s awesome to get a huge return of money, it’s not good. Here’s why.

If you are using your refund to pay down credit cards, which rack up interest all year. You could’ve had a little more money in your wallet to begin with, maybe you wouldn’t have needed to use your credit card. If you sat down and thought about it, all of that extra cash could have automatically been deposited into a retirement account.

Let’s say you get paid twice a month, and got a really nice refund this year of $1,200. That means you overpaid by $50 per paycheck. If you invested all that money and kept doing it for 30 years, you’d put away $36,000. Now, because of compound interest, you’d actually end up with a lot more money than that.

If your 401K or IRA made 6% a year, you’d actually end up with about a hundred thousand dollars after 30 years. About 60 grand of it would come from the compound interest alone.


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